AS MY PARTNERS AND I at Preng & Associates
complete our 35th year, we are reminded again
of the extreme cyclicality of the oil and gas industry. My view is biased. I have spent my entire
career in the oil and gas industry. My sons and
daughter work in the oil and gas business. We
know the challenges that executives and boards
face every day to generate cash flow and net
income to build their businesses.

Our clients are energy executives and boards. They repeatedly
tell us their most important asset is people: employees, colleagues,
peers, and partners. Their biggest challenge is not finding the next
Marcellus or Wolfcamp or creating the newest completion technology that unlocks millions of barrels. It’s finding and retaining the
right people who are motivated and talented enough to make the
organization better.

In the boardroom, our clients seek diverse views to get deeper
consensus on critical issues facing executives as the complexity of
the energy business increases. Executives running 21st century oil
and gas companies instinctively know they need, and quite frankly
want, more experience in the C-suite and the board room to make
better decisions. They have embraced the idea that the long-term
success and ultimately the highest value of the company will only
be achieved through diversity of skills and thought and incorporating
ideas of inclusion to arrive at the right decision. A balanced board
brings different perspectives, backgrounds, skill sets and experiences
– all of which should help the company make better decisions.

Assembling a well-balanced, high-performing board or management team with the desired skill sets is no easy task. That’s one of
the reasons I founded Preng & Associates in 1980. I wanted to help
management and boards in the energy industry attract exceptional
talent that would deliver long-term value to stakeholders.

Today it’s not uncommon to see an energy board made up of
diverse skills and experiences. Many have experienced petroleum
scientists, skillful financial experts, and knowledgeable executives,
most of whom have spent their entire careers in oil and gas. Proposals and actions made by the executive team can be checked-and-balanced by the board and vice versa. It’s a symbiotic relationship, vital for an organization to be successful. But it hasn’t always
been this way.

Up until 2002, regardless of the industry, many companies took
the friends-and-family approach when selecting directors. An effective director in the 1980s, 1990s, and early 2000s was a friend
from college, a fellow member of the country club, a former industry
colleague, or a member of church. Even athletes and celebrities
made their way into the boardroom. I’m not saying these were
incompetent people – many of these directors had successful
businesses of their own and could provide guidance to the management team. As long as the CEO and the executive team had
decent heads on their shoulders, corporations stayed afloat and
often prospered.

BOD: Who has a seat at the table?

The shortfall with the friends-and-family approach was that
corporate governance procedures, day-to-day decisions, and even
accounting practices did not always meet the highest standards.
More importantly, the checks-and-balances process could break
down. Some organizations made mistakes, missed strategic opportunities, and in some cases, intentionally or unintentionally
broke the law.

Cue the corporate and accounting scandals – WorldCom, Enron,
Tyco and others. These events cost investors on Wall Street and
employee 401(k) retirement plans billions of dollars. This lack of
confidence in corporate governance and accounting practices sent
shock waves through the stock market. The US government believed
stronger laws were needed, so in 2002 Sarbanes-Oxley (SOX) was
passed, placing greater responsibility and legal liability on corporate
boards.

SOX led the next evolution of the board. Companies now look
for what we call the “professional director.” Corporations need
directors who know the rules and can assure they meet or exceed
SOX requirements. Organizations have greatly improved director
evaluations and have hired former public accounting partners,
academicians, and retired law partners. In my opinion, the pendulum swung a little too far after SOX passed. Companies wanted
experts that knew accounting standards and corporate governance
criteria, but many lacked an in-depth understanding of the particular industry.

Enter the shale revolution. The use of horizontal drilling and
hydraulic fracturing to produce quantities of hydrocarbons once
thought impossible, pushed companies to make better, smarter
and faster decisions to stay ahead of peers. Companies were forced
to think differently about strategy and value creation and needed
a board that could support this new way of thinking. Today, I believe
the energy industry has found a happy medium. Boards now have
experienced technical talent, skillful financial experts, knowledgeable industry executives – and even a few relevant “outside the
industry” experts that provide unique perspectives to help the
organization thrive.

Just as the demographics of the boards have changed over time,
so has the role they are asked to play. Board members ensure
transparency and bring sound financial discipline, but they are
also being asked to identify opportunities in a rapidly changing
energy environment.

In the past 10 years, the industry has moved from developing
conventional resources to focusing more on unconventional targets.
With management teams focused on day-to-day operations, boards
are now providing higher-level insight. Going forward, companies
that can develop and leverage the combined and diverse experiences of the board will more effectively and efficiently develop
assets and outperform peers.